This Real Estate Financial Model provides a template spreadsheet that will help an investor evaluate a piece of real property by producing the following outputs: before tax cash flows, income tax liability, after tax cash flow, after tax cash flow on resale, tax savings on resale, and after tax equity on reversion. This form contains a guide to help investors use this spreadsheet and to evaluate the outputs when making a real estate investment choice. There is also a worksheet to calculate the discounted cash flow (DCF) and internal rate of return (IRR) of the investment.
REAL ESTATE FINANCIAL MODEL Real estate analysis requires greater focus on cash flow analysis, detailed planning and financial modeling to leap full tax benefit. It is a high risk investment, but if handled diligently the rewards are great. One aspect of real estate investment is getting the price right when buying the property; this is a determinant of how well the investment will perform. Also financing should be arranged inline to meet the objective of the investment, by consideration whether the property is to be flipped soon or it is a long term investment, the consideration ought to be factored when analyzing the project. The Real estate excel template helps the user determine the financial viability of the property by delivering the following outputs Before tax cash flows Income tax liability After tax cash flow After tax cash flow on resale Tax savings on resale After tax equity reversion The decision criteria is based on valuation worksheet, the criteria on decision have to be based on net present value or internal rate of return. A positive net present value indicates the project is viable for investment; this is the basis of making decision. The internal rate of return is used to evaluate whether the project meet the investors required rate of return. The financing trick for investing in the project is to arrange with financier to apply payment to interest on loan instead of principle, the advantage of the arrangement is based on the fact that interest is tax allowable and principle on loan is not. This arrangement allows the investor to leap on great benefits out of investments and avoid huge tax on capital gain when the property is disposed. The real estate excel template helps the investor conduct three steps, the steps are cash flow determination, equity tax reversion for evaluation on gain on sale and decision process to evaluate the project viability based on net present value or internal rate of return. The manual work for the user is to key in gross revenues expected to be generated by the property, expenses associated with revenues and selling commission plus the effective tax rate. The template calculates the cash flows and presents the net present value and internal rate of return. The depreciation is calculated by dividing the cost of property by 39 years, 39 years is the allowed straight line depreciation for commercial property. The equity reversion recoups back part of depreciation because of tax treatment. There is tax on capital gain when a property is sold at a price higher than the acquiring cost; this is taken care off by equity reversion process. The equity reversion process produces the income after tax. The system of determining the viability of the project is same for small or large projects; the benefits are leaped by smartly organizing financing and tax arrangements. REAL ESTATE INVESTMENT ANALYSIS FINANCIAL MODEL The Cost of the Property $ 129,000.00 The Sale Price $200,000.00 Before Tax Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Gross Rent $ 8,000.00 $ 7,000.00 $ 22,394.00 $ 23,962.00 $ 25,639.00 Vacancy $ (3,130.00) $ (2,930.00) $ (2,687.00) $ (2,396.00) $ (2,564.00) Effective Gross Income 4,870 4,070 19,707 21,566 23,075 Operating Expenses $ (3,664.00) $ (3,884.00) $ (4,117.00) $ (4,364.00) $ (4,626.00) Advertisements $ (600.00) $ (636.00) $ (674.00) $ (715.00) $ (757.00) Net Operating Income $ 606.00 $ (450.00) $ 14,916.00 $ 16,487.00 $ 17,692.00 Mortgage Payment/ Interest $ (9,869.00) $ (9,869.00) $ (9,869.00) $ (9,869.00) $ (9,869.00) Before Tax Cash Flows $ (9,263.00) $ (10,319.00) $ 5,047.00 $ 6,618.00 $ 7,823.00 Income Tax Liability Net Operating Income $ 606.00 $ (450.00) $ 14,916.00 $ 16,487.00 $ 17,692.00 Depreciation (3,307.69) (3,307.69) (3,307.69) (3,307.69) (3,307.69) Mortgage Payment/ Interest (9,869.00) (9,869.00) (9,869.00) (9,869.00) (9,869.00) Taxable Income -12,571 -13,627 1,739 3,310 4,515 Marginal Tax rate 0.28 0.28 0.28 0.28 0.28 Taxes(Savings) $ (3,519.79) $ (3,815.47) $ 487.01 $ 926.89 $ 1,264.29 After Tax Cash Flows Before Tax Cash flows (NOI) $ 606.00 $ (450.00) $ 14,916.00 $ 16,487.00 $ 17,692.00 Taxes (Savings) $ 3,519.79 $ 3,815.47 $ (487.01) $ (926.89) $ (1,264.29) After Tax Cash Flow $ 4,125.79 $ 3,365.47 $ 14,428.99 $ 15,560.11 $ 16,427.71 Cash Flow on Property Sale Before Tax Equity Reversion Property Sale Price 200,000.00 Selling Expenses $ 4,000.00 Net Sales Price 204,000.00 Unpaid Mortgage Balance $ (79,655.00) Before Tax Equity Reversion 124,345.00 Tax Savings on Resale Estimated Sale Price 200,000.00 Selling Expenses (7,418.00) Net Sales Price 192,582.00 Adjustment Basis (112,461.54) Total Gain/Loss on Sale 80,120.46 Depreciation recovery 16,538.46 Depreciation recovery tax rate 25% Depreciation recapture tax $ 4,134.62 Capital gain $ 75,985.85 Capital gain Tax 10% Capita gain Tax $ 7,598.58 Total Tax on Sale $ 11,733.20 After Tax Equity Reversion Before Tax Equity Reversion $ 124,345.00 Total Tax on Resale $ (11,733.20) After Tax Equity Reversion $ 112,611.80 DISCOUNTED CASH FLOW Discounting Rate 20% Down Payment 25% Originating Fee 10% Year 1 Year 2 Year 3 After Tax Cash flows 1 2 3 $ 4,125.79 $ 3,365.47 $ 14,428.99 Discounted Value $ 3,438.16 $ 2,337.13 $ 8,350.11 Total Present Value $ 73,487.41 Down Payment $ (45,150.00) $ 4,125.79 $ 3,365.47 $ 14,428.99 Net Present Value $ 28,337.41 Internal Rate of Return 37% CASH FLOW Year 4 Year 5 4 5 12% $ 15,560.11 $ 129,039.51 15% $ 7,503.91 $ 51,858.09 4% $ 15,560.11 $ 129,039.51
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